On Friday, the Commerce Department reported that consumer spending fell in April, its first drop in over a year. Consumer spending declined 0.2% for the month, after a 0.1% increase in March. Economists had been expecting a modest increase in spending.
When the agency initially estimated 1st Quarter growth of 2.5%, I noted that the data had worrying trends. The lift in GDP was mostly due to an increase in consumer spending after the first of the year, but that earnings were flat. The savings rate had dipped sharply, suggesting the consumers were dipping into savings to sustain their spending. That seemed unsustainable.
Turns out it was, as consumers clearly cut back last month. Consumer spending propels about 70% of the economy. April’s weakness will result in a general slowdown in the economy. Economists are now expecting 2nd Quarter growth to slide to 1.5-2%. Even that tepid rate of growth, however, may be too optimistic. If we’ve learned anything in the past few years, it’s that economic news tends to surprise on the downside.
Still, if 1.5-2% growth is our best case scenario, it will be a very long time until our economy is truly on the mend.